Monthly Archives: March 2016

Top Likely

Over the past two weeks I’ve been expecting a short term top (at the least). It appears that the selling has started. The first evidence comes from daily momentum and sentiment for the S&P 500 Index (SPX) generated from the Twitter stream. It printed a -21 on Thursday, which I consider an initiation thrust. When large negative prints occur near a market peak it usually results in at least a few more days of selling. That’s during a long term uptrend. If we’re in a long term downtrend then the selling could last much longer. Notice the daily indicator is spending a lot more time below zero than above, which is clearly bear market behavior.

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Another sign that selling has started is negative weekly readings for a majority of sectors after two weeks of all positive readings. The buying across all sectors has stopped, which should result in a market wide dip.

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From a price perspective, traders are tweeting the 200 dma as support, but not much below that. If 2025 on SPX breaks there is a tiny bit of support at 2000 then lots of white space all the way to 1810. When traders aren’t tweeting support it indicates indecision, which often results in steep declines.

160325spxSR

Breadth continues to improve. This is one of the few signs that we may not be in a bear market.

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Conclusion

The short term top is likely behind us and some consolidation is in order. The initiation thrust from daily sentiment and lack of buying in a majority of sectors suggests the selling has started. Bulls want to see traders tweeting support closer to current levels (rather than way down at 1810 on SPX) or we risk a waterfall decline.

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Another Week – Same Story

Everything from last week remains the same except for price. Price for the S&P 500 Index (SPX) hesitated for all of a day at the 200 day moving average that everyone was tweeting, then blew right through it. Now traders are targeting 2070, 2080, and 2100. That is about the only difference in our Twitter indicators from last week. One thing on the price target chart that’s interesting is the 1810 level is still being tweeted by multiple people almost every day. That suggests there’s still a lot of fear and doubt about this rally.

160320spxSR

Last week all sectors were green, which almost always marks a short term top. This week all sectors are positive again. This is only the second time this overbought condition has occurred two weeks in a row. The last time it happened, price pushed higher during the second week, only to fall the following week. So this indicator is calling for a short term top.

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7 day momentum and sentiment from Twitter is telling the same story as last week. No one likes this rally. There are a lot of tweets calling it a bear market rally, which is keeping the indicator below zero.

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Breadth continues to improve in the face of negative sentiment.

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Conclusion

Another week, same story. The sectors show an overbought condition and 7 day momentum can’t get above zero. This indicates we should see a short term top this week.

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Short Term Top Likely

Last week I mentioned that the 200 day moving average for the S&P 500 Index (SPX) was what everyone on Twitter was talking about, and as a result, it should provide resistance. Well, we’re sitting right at that resistance so we should see some profit taking at the least. One thing of note, is that people on Twitter are still calling for a retest of the February lows. This is in contrast to the September 2015 low where traders started looking up. It suggests that fear is still lingering.

160313spxSR

Another sign that we’re close to a short term top comes from sector sentiment. Almost every time in the past when all sectors were positive it marked a short term top. Every sector was positive this past week, so odds favor a decline this coming week. What I’ve observed in the past is that sector sentiment acts as an overbought and oversold indicator. The last oversold signal (all sectors negative) came in mid February, just as the market was bottoming… which was a very good call.

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7 Day momentum has turned back down below zero and is starting to break its confirming uptrend line. This also suggests that traders are selling into this rally.

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Breadth between bullish and bearish stocks continues to climb due to a fall in the bearish count. The bullish count is starting to stall, which suggests traders are no longer finding new buying opportunities. Another small sign that a short term top may be near.

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Conclusion

We should be close to a short term top. SPX has reached most traders price target at the 200 dma, sector sentiment is overbought, 7 day momentum is rolling over and breaking trend, and the number of bullish stocks is stalling. Expect some weakness this week.

 

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It’s All About the 200 DMA

The 200 day moving average for the S&P 500 Index (SPX) is all anyone really cares about right now. Once 2000 on SPX was broken to the upside the 200 dma near 2025 became the next major resistance level. The vast majority of tweets are targeting that area. When everyone is watching the same overhead level it becomes natural resistance so we should expect a pause this next week if the market pushes higher.

160306spxSR

Momentum and sentiment from Twitter for SPX is stalling as a result of the large number of tweets mentioning overhead resistance. However, the move in the market was enough to create a new confirming uptrend in 7 day momentum. Watch for a break of that trend line for a sign we’re resuming the longer term down trend.

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Breadth between bullish and bearish stocks is rising sharply as the bearish count falls and the bullish count rises. Breath printed +22 on Friday. As I mentioned last week, I think the indicator has a bullish bias, so a level above zero (maybe +20 to +25) might be where bear market rallies peak. We’ll need to watch and see how it performs if the market turns back down. The level where breadth peaks will give us a reference point for future bear market rallies.

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Sector sentiment was mostly positive last week.

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Conclusion

About the only thing to watch this coming week is how the market, breadth, and momentum react to the 200 day moving average on SPX. You can watch daily breadth from Twitter here, and Twitter momentum and sentiment for SPX here. Bulls want to see 7 day momentum hold its trend line. A failure would likely indicate a resumption of the down trend.

As a side note, the Downside Hedge Market Risk Indicator cleared its warning last Friday. This doesn’t mean the bear market is over. On the contrary, look at the chart below and you’ll see many times where the indicator cleared just before the market resumed its downtrend. It is designed to warn when there is significant risk of a waterfall type decline. It has a good track record of warning before large declines, but whipsaws often as a market top is being built. The current picture is looking a lot like late 2007 and early 2008.

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Sentiment Stalling

Even after yesterday’s strong rally, 7 day momentum for the S&P 500 Index (SPX) can’t get above zero. It appears that traders sold into yesterday’s rally, rather than getting excited for a sustained up move. Take a look at daily sentiment, it printed nearly -10 on a 2% up day. It makes this move look more like a bear market bounce than the start of a new bull.

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Breadth didn’t react to yesterday’s move the way I would expect in a bull market either. It looks like it might be rolling over as well. Something to keep an eye on over the next several days.

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Conclusion

Sentiment and breadth from the Twitter stream are struggling to move higher as SPX rallies. Not the type of behavior we see in a bull market. We’re likely seeing a bounce in a bear. Be cautious, because we may be close to capping this rally.

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